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Asset managers need to regain customer trust

Posted by on 24 April 2017
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The asset management industry has failed to manage its single most important asset.

Speaking on a panel at FundForum Asia, Andy Agathangelou, founding chair of The Transparency Task Force in the UK, warned that the industry had not managed its reputation well.

He said this failure had become a global issue, which manifested itself in many ways, including record low savings rates in the UK.

“We are starting to properly understand the correlation between transparency, truthfulness and trustworthiness,” he told FundForum Asia.

“The asset management industry must do a far greater job of managing its reputation and within that we all have a collective responsibility,” Agathangelou said.

Jason Hsu, chairman and CEO of Rayliant Global Advisors, agreed, suggesting the shift away from actively managed funds to passive and quasi-passive ones was in part driven by disappointment among investors and a distrust of the value created by the industry

He said: “The average active manager has not really done well on a fee basis and that has driven the shift into passive and smart beta passive.”

He added that research showed that if investors had followed the advice of standard institutional consultants and performance selection criteria for the past three years, the performance outcome would have been around 200 basis points behind if they had randomly selected the funds and managers.

“The advice we charge our clients for is not very useful, it is even counterproductive,” he said.

Agathangelou agreed: “Active asset management is in crisis because it is failing to demonstrate that it does add value.”

He said technology could be the saviour of active management, enabling it to deliver value through operational efficiency and by harnessing the power of the digital world.

“I see the future as a blend of both active and passive but it can only survive if active funds find a way of delivering value,” he said.

A need for transparency

Andy Brown, investment director at Prudential’s Portfolio Management Group, said the industry no longer had the trust of investors because it stopped trying to understand their needs and requirements.

He added that the need for transparency did not just cover cost, but also a whole range of other things.

“The industry has lost sight of the fact that probably the best outcome a client can get is one that they expect to get.

“Perhaps the client should become the new benchmark rather than trying to beat the industry,” he said.

Hsu pointed out that while the Asia wealth management industry was very much based on a trust relationship, this was not because it was a high trust society, but rather because in many ways it was a low trust one.

“You distrust disclosure and your ability to understand products and the services offered so that you only want to limit your transactions to people in your social circle,” he said.

“The desire for transparency and disclosure has been minimised because you have narrowed your interactions to parties you trust.”
Agathangelou pointed out that in the financial services market there was a huge issue around the asymmetry of information, with the buyer often working on just a fraction of the information that was available, which enabled the industry to capitalise on the unintended ignorance of the consumer.

“This is unfair and this is wrong. We have to develop the industry so the market as a whole becomes trustworthy,” he said.

He added that as it became increasingly difficult to differentiate by product and performance moving forward, transparency would become a commercial virtue.

“Market share is going to go to those organisations that can demonstrate transparency, truthfulness and trustworthiness,” he said.

He added that value and an alignment of interests with investors would also be key.

“Organisations that are able to demonstrate they have a true alignment of interests with their customer base will succeed and take market share,” he said.

The end of AMC

But he warned that it was difficult for asset managers to demonstrate an alignment of interests if they had an annual management charges model.

He said: “AMC will become a thing of the past in its true simple terms.

“I think we will see a radical shift away from a straightforward AMC model to those models that are aligned with an alignment of interest approach.”

He added that as an industry, asset managers spent too much time thinking about how to invest and not enough time thinking about why they invested, but the growing emphasis on environmental, social and governance (ESG) was starting to shift this approach.
Brown agreed: “ESG investing and being able to understand the impact of an investment in a slightly different way and seeing if there is a direct impact on returns has been positive.”

But he added that this approach involved a human being and investors would have to pay for this approach.

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